Do­ing so helps you clearly iden­tify goals and work to a plan of get­ting there in your earn­ing years

India Today - - SMART MONEY | FINANCIAL PLANNING - —By Renu Ya­dav

Most peo­ple tend to have a ran­dom ap­proach to­ward per­sonal fi­nance. They ei­ther in­vest what­ever is left af­ter spend­ing rather than the other way round. Or they in­vest in mul­ti­ple in­stru­ments rather than in a prod­uct suited to their needs. As a re­sult, they are un­able to meet their life goals. Fi­nan­cial plan­ning gives you a bird’s eye view of your fu­ture goals, helps you pace your fi­nan­cial jour­ney and en­ables you to achieve your goals op­ti­mally and ef­fi­ciently. How­ever, while in­vest­ing is an im­por­tant as­pect of fi­nan­cial plan­ning, a fi­nan­cial plan is much more than just in­vest­ing. To em­bark on this jour­ney, you need to do the fol­low­ing:


Draw­ing up a bud­get is the first step to­ward fi­nan­cial plan­ning as it gives you a clear idea of your fi­nan­cial po­si­tion. To make a bud­get, list your in­come from all sources, be it salary, rent or in­ter­est. Then list all your ex­penses, in­clud­ing pay­ments of in­sur­ance pre­mi­ums and school fees, which may dif­fer in pe­ri­od­ic­ity, but have to be di­vided monthly to be added to the ex­penses for a month. At the end of the ex­er­cise, you will find your­self with an in­vestible sur­plus. You’ll also be able to iden­tify the months you may face a cash flow prob­lem in for which you can pre­pare in ad­vance. Your ex­penses also need to be listed un­der dif­fer­ent heads, so that you can de­lin­eate dis­cre­tionary ex­penses and cut down on them if you need more money to meet your life goals. “If this ex­er­cise is not done, then the plan might trig­ger bud­get gaps. Pre-plan­ning a bud­get can help you avoid the need to re-plan,” says Jee­van Ku­mar, head of in­vest­ment ad­vi­sory at Geo­jit Fi­nan­cial Ser­vices.


Pro­vid­ing for ex­i­gen­cies, such as a job loss or med­i­cal emer­gen­cies, is an im­por­tant part of fi­nan­cial plan­ning. It saves you from dig­ging into your sav­ings or bor­row­ing un­nec­es­sar­ily.

To pre­pare for un­fore­seen events, the first thing you should do is set up a con­tin­gency fund, a cor­pus that can take care of 3-6 months of ex­penses. You can put this money in a liq­uid fund as it gives bet­ter re­turns than money in a sav­ings bank ac­count. Al­ter­na­tively, you can go for a short-term

fixed de­posit with in­stant redemp­tion fa­cil­ity (of Rs 50,000 or 90 per cent of in­vest­ment value, which­ever is lower). Over the medium term (more than three years), they also have a tax ad­van­tage over bank FDs as long-term gains are el­i­gi­ble for in­dex­a­tion and hence re­duces tax outgo; in­ter­est on bank FDs, con­versely, is taxed ac­cord­ing to your tax slab.

Next, you need to have a med­i­cal cover for your­self and your fam­ily. The amount of cover can vary with fac­tors such as the health con­di­tion of fam­ily mem­bers, city of res­i­dence, life sta­tus, na­ture of job, af­ford­abil­ity etc. As a

rule of thumb, you should have a health cover 10 times your monthly in­come, go­ing up to 20 times. Fam­ily floaters are bet­ter, cheaper op­tions than in­di­vid­ual health poli­cies for fam­ily mem­bers. You can also go for top-up plans.

Then, you need to have ad­e­quate life cover. Buy­ing just any life in­sur­ance is not enough. The ideal in­sur­ance cover should be at least 10 times your gross an­nual in­come. Or you can have an in­come plus ex­pense ap­proach. “The life cover should be suf­fi­cient to cover cur­rent house­hold and life­style ex­penses, EMIs, SIPs, pre­mi­ums, present value of fu­ture goals so that all those can con­tinue in case of an un­for­tu­nate event,” says Tarun Bi­rani, founder & CEO of the SEBI-reg­is­tered TBNG Cap­i­tal Ad­vi­sors. Pure term plans are the best and cheap­est as they give high life cover at less cost.


It is very im­por­tant that you as­sign mon­e­tary val­ues to your goals to as­cer­tain how much you need to save. Also fac­tor in in­fla­tion—you need to cal­cu­late the com­pounded value of the goal at the rate of in­fla­tion on the re­quired date. “One needs to be cau­tious while us­ing inf la­tion num­bers, since over longer pe­ri­ods, even a small gap can re­sult in wide cor­pus spreads,” says Ku­mar. One can also have dif­fer­ent port­fo­lios for dif­fer­ent goals. “If dif­fer­ent goals fall at dif­fer­ent points of time and if this in­ter­val is too wide, sep­a­rate in­vest­ments should be made.” A Rule of 72 can help you de­cide the goal amount. Di­vide 72 by the ex­pected rate of in­fla­tion (say, 6 per cent), and you get the years (in this case, 12) it will take for prices to dou­ble.


Risk ap­petite helps you de­cide the debt-eq­uity ra­tio. To cal­cu­late your risk ap­petite for eq­uity, the thumb rule to fol­low is: 100 mi­nus your age. So if you are 30 years old, 70 per cent of your port­fo­lio should be in eq­uity. Debt in­cludes op­tions such as bank FDs, small sav­ing schemes and debt mu­tual funds. Ex­po­sure to eq­uity can be achieved ei­ther through di­rect in­vest­ments in stocks or eq­uity mu­tual funds de­pend­ing on one’s risk ap­petite and knowl­edge of mar­kets. For short-term goals, it is not ad­vis­able to in­vest in rel­a­tively volatile as­sets such as equities. How­ever, for long-term goals such as re­tire­ment, one can have higher ex­po­sure to equities, as they fetch higher re­turns in the long run.

“For short-term goals, due in 2-3 years’ time, you can­not take much risk by in­vest­ing in equities, since eq­uity mar­kets are very volatile for short du­ra­tion in­vest­ments, and must stick to debt or fixed de­posit-like safer in­stru­ments, which are less volatile and pro­tect your cap­i­tal as well,” says Bi­rani. Even for long-term goals such as re­tire­ment, one can’t rule out debt en­tirely. More eq­uity can make a port­fo­lio too risky while a debt-heavy one gives lower re­turns. You need a right mix of the two.


De­pend­ing on your debt-eq­uity ra­tio, you can work out an ex­pected rate of re­turn on in­vest­ments. The more your ex­po­sure to eq­uity, the higher your likely rate of re­turn. With the value of goals, the ten­ure and the ex­pected rate of re­turn on in­vest­ments, you can cal­cu­late how much you need to in­vest monthly, an amount that should be re­vised with rise in in­come. If you can’t in­vest the re­quired amount, re­visit your bud­get and pare down dis­cre­tionary ex­penses. Else, you need to make your goals more re­al­is­tic.


Tax sav­ing is not a stan­dalone ac­tiv­ity and should be aligned with one’s over­all goals. Most peo­ple in­vest in tax-sav­ing mu­tual funds or en­dow­ment plans and think they’re done with tax sav­ing. “If you plan your in­vest­ments in a struc­tured way, your in­vest­ments can help you avail de­duc­tions in your tax­able in­come,” says Bi­rani. Choos­ing the right in­stru­ment is cru­cial. One should con­sider fac­tors such as lockin pe­riod, tax on ma­tu­rity, etc., apart from re­turns. Term and health in­sur­ance pre­mi­ums help save tax, as do ELSS and ULIPs, while al­low­ing you to in­vest in eq­uity. In­vest­ments in fiveyear FDs and PPF do the same for the medium and long term, re­spec­tively.


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